Insight into Health Care Self-Insurance and Stop-Loss Coverage: Essential Knowledge for Business Owners

Opting for self-insurance entails shouldering the responsibility of funding and managing the plan, often with the aid of a third-party administrator. While this route offers greater control and potential cost savings, it also exposes businesses to the full financial risks of healthcare expenses. Enter stop-loss coverage — a vital safeguard against unpredictable and potentially catastrophic losses in a self-insured scenario. Understanding the fundamental features and intricacies of stop-loss coverage is essential for business owners considering the self-insurance route in the realm of employee health benefits.

Basic features
Stop-loss coverage is essentially insurance for your health insurance. These high-deductible policies help protect against unpredictably high or catastrophic losses.

More specifically, stop-loss coverage kicks in once an individual claim and, if the self-insured policy is so designed, annual aggregate claims reach a contracted threshold known as the “attachment point.” Some stop-loss policies cover only individual claims — known as “specific” coverage — instead of providing both specific and aggregate claims protection.

Typically, the larger and more profitable the business, the higher the stop-loss deductible and attachment point. This is because larger companies are usually less financially vulnerable to an occasionally catastrophic medical claim. Self-insurance generally isn’t economically advantageous for companies with fewer than about 75 employees.

Claims and coverage
Aggregate claims protection typically works like this: You and your broker or claims administrator agree on an estimate of what total claims will be in the upcoming year, based on your recent claims experience. Let’s say it’s $1 million. The aggregate attachment point generally will be set at 125% of that amount — that is, claims will be covered when you have already paid out $1.25 million.

There can be a complicating factor, however, known as a “laser.” A stop-loss carrier, or you, might decide that an employee with a high medical risk profile needs to be “lasered” out of the terms that apply to other employees covered by the stop-loss policy. Instead, you’ll remain on the hook for a much higher amount before stop-loss protection kicks in. You might request a laser to lower your premium, or the stop-loss carrier might demand it to manage its risk.

What’s a typical specific coverage amount? As with the decision of whether to include an aggregate claims limit on your stop-loss coverage, the answer generally varies according to business size. Many stop-loss buyers pick an attachment point for individual claims at below $250,000, with some businesses setting the limit below $75,000. However, some set higher limits as well.
Basically, it’s a question of how much financial protection you’re willing to pay for. Going with a higher attachment gets you lower premiums. For example, a premium per covered employee with a $100,000 deductible might be around twice as high as it would be for one with a $200,000 deductible, and more than five times as high as one with a $500,000 attachment point.

Many challenges
As you can see, self-insurance has many challenges — starting with stop-loss coverage, which is a necessity. Nevertheless, it can be an effective approach under the right circumstances. We can help you assess the costs, risks and potential advantages of self-insuring vs. fully insuring. Please contact your Rudler, PSC advisor at 859-331-1717 with any questions.

RUDLER, PSC CPAs and Business Advisors